“truly another very positive development for the Irish economy” – Minister Noonan welcomes investment in Bank of Ireland

Following on from what were described by Minister Leo Varadkar yesterday as “not non-serious” talks between the Department of Finance and a group of unnamed international investors, Minister for Finance, Michael Noonan has announced this morning the conclusion to these talks with the still unnamed investors agreeing to invest “up to” €1.123bn for “up to” 37% of Ireland’s oldest bank, Bank of Ireland, which is presently 37%-owned by the State.

“The commitment by a number of significant private sector investors to invest side by side with the State’s retained holding without any form of additional risk sharing by the State reaffirms the credibility of our stress tests” claimed the Minister. The €5.2bn identified in the March 2011 stress tests will be reduced by €2.4bn, being the contribution from subordinated bondholders in “ongoing and future burden sharing” plus the €1.1bn from this morning’s announced transaction. Meaning that Bank of Ireland will consume just €1.7bn of a State injection later this week in addition to the €3.75bn already “invested”

Worryingly the Minister is saying that the investment in the banks later this week of approximately €18bn will be taken from Ireland’s own funds, and not those provided by the EU/IMF who are now offering the bailout funds at ~3.5% in the EU’s case and 4.77% in the IMF’s case (and that will shortly drop). The Minister claims that using our own funds will result in interest rate savings. A worry on here is that depleting our own funds, especially when low interest funding has now been made available by the EU, will curtail our freedom of action when the inevitable talks on default (senior bondholders at Anglo and INBS, and potentially others, and potentially sovereign akin to the Greek solution) start later this year. Last year the NTMA generated a return of 11.7% on its assets under management. If these returns are still available, why use these funds when the EU/IMF funds are available at approximately 4% blended average?

At 10:30am today, Bank of Ireland’s shares were trading at 11c a share, up .9c or 9% on the day. There will be further reporting and analysis of this transaction later today.

UPDATE (1): 25th July, 2011. The Irish Independent is claiming that veteran US investor, Wilbur Ross of WL Ross is one of a group of international investors which has bought into Bank of Ireland. Last year and indeed until March this year, Wilbur was considered to be at the fore of the group poised to acquire the Educational Building Society (alongside the Carlyle Group from the US and local boys, the Dublin-based Cardinal Group). That sale fell through when the incoming government decided to take the sale off the table. EBS was subsequently merged with AIB. But Wilbur it seems is back, though this time without Carlyle or Cardinal.

UPDATE (2): 25th July, 2011. RTE broadcast news (Six One News) reports that Cardinal is in fact a party to the Bank of Ireland deal, contrary to the report in the Independent. A Canadian company is reported to be the third party to the deal.

UPDATE (3): 25th July, 2011. Canadian investor Fairfax (corporate website here) has been named as “leading the consortium of new investors”.

UPDATE: 27th July, 2011. RTE Six One News, and now RTE online, has reported the names of three more investors who are part of the above consortium – Capital Research (part of The Capital Group), Fidelity Investments and Kennedy Wilson. No word of the Cardinal Group named by RTE as an investor on Monday.

UPDATE: 31st July, 2011. The Sunday Independent reports that Fairfax and WL Ross have each taken a 9% stake in Bank of Ireland.

UPDATE: 28th February, 2013. Just as a footnote to the deal announced above, the deal concluded and on 26th February 2013 in the Dail, the Minister for Finance provided the following response to a parliamentary question from the Sinn Fein finance spokesperson, Pearse Doherty “On 25 July 2011, the Minister for Finance announced that a group of investors had committed to buy up to €1.1bn of the NPRF’s shares in Bank of Ireland. This commitment reduced, from €1.9bn to €0.8bn (58% reduction), the potential maximum cost for the State to meet the bank’s PCAR equity capital requirement. As a result of investment from other non-Government sources, the total cost to the State (through the NPRF) from underwriting the bank’s equity capital raise reduced from €0.8bn to €0.2bn (including net underwriting fees received by the NPRF of €0.05bn).

The actual amount sold by the NPRF to the investors was 10.5bn Bank of Ireland shares at a price of 10c per share. The disposal of these shares took place in two tranches. The first disposal for €0.24bn settled on 2 August 2011 with the second, and final, tranche for €0.81bn settling on 17 October 2011.

The net proceeds from the disposals were transferred, on foot of a Ministerial Direction, from the NPRF to the Exchequer within 5 days of receipt from the investors.

@Rob S/jj, by reference to what aspects of this deal might you conclude the deal is a good one? Has the Minister for Finance achieved a good deal in terms of selling a 37% stake for €1.1bn? What metrics would you use, on which to base your judgment?

well either it is over – valued and we should stop recapitalising the banks – or it is undervalued and we should borrow and invest in the banks.

Positive from a perspective of new capital into the banking system, external, which will create some positive spin for the economy as a whole.

Positive from a perspective of reduced spending from state’s perspective.

Valuation is a negative – I think it is cheap but hard to justify a run-off bank and what multiple you would use. But conversely, if this is cheap, then other banks are cheap and the state’s investment is worth something (which is not taken into account in the national debt figures).

Why do potential investors in BOI need to talk to the department of finance? If they’re getting non-public information from the government that influences an investment decision, is there a requirement that this is made public?

What if they receive information on future government support (/dilution), deleveraging costs, even covering NAMA losses*.

*NWL – there was an article in the yesterday’s Sunday Times that NAMA are due to increase provisions to 1.3bn.

@Ahura, “there was an article in the yesterday’s Sunday Times that NAMA are due to increase provisions to 1.3bn.” thanks. Remember that accounting rules do not require NAMA to revalue their loans to assume that there is 100% default and that NAMA must realise the value of the loans by disposing of property, The underlying property is likely to have deteriorated in value by about €5bn since NAMA valued the loans by reference to 30th November, 2009. But IFRS 9 will allow NAMA recognise a fraction of this paper loss, which might be recouped in future years (or might grow bigger!)

b) The fact it will be one less institution to attempt to privatise in the future.

c) Perhaps Eoin Bond over at IE would be better able to surmise the market perception, but it would seem to me that having someone dip their toe in the water in the Irish banks may ease the scepticism of other investors.

Doesn’t using stakes and actual number of shares muddy the waters here? I mean, with the amount of extra shares that have been created since the crisis in BoI or the lengths the Government have gone to to pump in capital without taking full ownersSIP? Whats BoI’s current market value based on outstanding shares?

Basing my humble calculations on the Bank of Ireland 2010 report, this is definitely not a good deal for the State.
The total book equity at the end of 2010 was 7.4 billion thereby valuing the 37% stake being sold at 2.7 billion. That €2.7 billion is being bought for €1.123 or 41% of the book value.
This means that the State loses 59% of its piece of its existing 36% equity in BOI (7.4 * 36% * 59%= 1.57 billion loss).
Now for the real crunch.

The State is just about to put in 19 billion into the State banks. Is the State in line to lose 59% of this €19 billion = €11.1 billion even before the money goes in?

Of course the numbers may have changed slighlty since BOI produced its 2010 annual report in April this year. But Annual report are still supposed to mean something. Even bank annual reports.

So on face value this looks like a terrible deal.

A 59% haircut on the State’s BOI existing holding, with possibly the same implications for the pending €19 billion recapitalization.
Disaster is too kind a word.

There is roughly 30bn shares (after rights issue etc, tradinig at 10-11c – at 10c, values the bank at €3bn.

My understanding is the state put in €3.5bn into BKIR so far.

1,837 million units of preference stock held at their issue price of €1.00 paying an annual dividend of 10.25% (€1.8bn valued at par*)

If they do not get any more shares, they would own 15% of BKIR or c.€450m.

So total value €2,287m from an investment of €3,500m (or loss of €1.2bn). If they have to subscribe for new shares at 10c (and given they trade there, there would be little or no gain or loss).

Not sure where your numbers are coming from.

*In typical Irish fashion, the details of the plan are opaque, but would be of the opinion the preference shares remain outstanding. It would also be fair to value this at sub par, given other debt trading levels.

But either shares are cheap or expensive at 10c. If expensive and we think it is bust, we are extremely wise to sell some of the commitment to these (unknown) investors, if cheap, then we have no problem at all as the national debt figures don’t include these assets.

In the figures I used, I am not relying on the trading value of the shares at all.
I am using the book value as per the 2010 BOI annual report.
This is after all the value the directors ascribe to the assets of BOI. The ‘book value’ as distinct from the stock market valuation.

Equally I did not get into the distinction between different kinds of equity. Several reasons for this: lack of time, lack of clarity on 37% being sold. Is it ordinary shares/ pref shares?
The calculation gets very complicated at that stage.
Still taking that statement at face value, taking the 37% of book capital figure being sold the numbers I used would stand up.
It is of course an oversimplication.
But I would be interested in the details of the State’s book loss when more detail is known.
AT face value the deal is a disaster.

I don’t know if it is ordinary or pref shares or whatever. I have not got the info.
Book value as per the 2010 BOI is book value. That is what the books says the bank is worth at Dec 2010 (published in April 2011). The State had 36% of BOI at that stage.
That value is now to be independently reduced by the sale of 37% of the company at a haircut (ignoring diff between ordinary and pref shares).

When the detail of the shares being sold etc is known (perhaps it already is?) , then it is possible to do the definitive calculations of the State book loss.
And there is a huge book loss here.

To answer you question as to why the deal is a disaster.
1. There is a substantial book loss. The State is now sitting a a huge loss on its existing investment in BOI. The loss is being crystalised by this deal.
2. There is now €19 waiting to go into banks. If the same % loss repeats itself, then that €19 billion too will suffer a huge loss.
3. We are now into the twin policies of forced deleveraging and forced recapitalization. With both of these policies there will be huge book losses in the live banks, in the dead banks and in NAMA. That is the way of distressed assets sales. To dress up the wording of ‘distressed asset sales’ with the failed management speak of ‘deleveraging’ will not change the reality one iota.

The State policy should be to retain the banks in public ownership and / or through bank levies ensure that Irish banking sector pays back every red cent of the State subventions and compensates in full for the destruction caused to the State and its people. Even it it takes ‘ a thousand years’.

I simply cannot subscribe to the ECB big banking philosophy that bank losses are the responsibility of citizens while banks having been nurtured back to profitably must immediately be reprivatised so that the profits can again accure to the large financiers.

It is a philosophy that will destroy the concept of a social democratic Europe, if it has not done so already.

But if more losses are likely isn’t it positive that the government has convinced some private investors to invest – i.e. they will share in the losses. -instead of the government investing this money they have found some external investors to do so.

I still think you are mixing up terms with book loss and book value – two different things.

I believe it is easier to examine on a cash in and cash out (or current valuation).

Your privatisation point is misplaced and misinformed – the ECB has not asked for the banks to be re-privatised. They just don’t want state controlled entities operating outside their state boundaries.

My reprivatization comments were taken directy from the original MOU document (page 9 and 10). I have reconfirmend this but the document will not allow copy/paste for some reason.
That particular MOU document always seems very hard to find!
But I think you read it in order to determine who is misimformed.
Misplaced is matter of opinion. I will leave that to the site manager.

Suffice to say that I will hold my views until they are shown to be definitively correct.
I have just looked at the Minister Statement. It provides no useful information in terms of determining the States loss on existing book value.

In addition it points to the Preference share dividend on preference shares. Perhaps. But the BOI 2010 annual report says that this dividend is subject to approval by the Board. A Board that the State will not control given it % of the shareholding. Again maybe the State has a way around this. Maybe not.

I have the IMF document – but not sure we are both referring to the same document. I would find it hard to imagine that the state are obliged to re-privatise the banks. They will, but that is a matter of policy as oppose to something they have agreed to.

“Why use these funds” ? This is all part of the shrinking and recapitalisation of the Irish Banking sector that was agreed last November with the EU/ECB/IMF, as part of the terms of the bailout. I remember Holohan’s nervous little laugh as he said he couldn’t understand why such onerous terms of recapitalisation were required. It seemed to me at the time to be fairly clear cut. Ireland would be required to stuff the banks full of cash and sell them off to the private sector on very attractive terms. This is the norm, following the tracks of the IMF modus operandi that favours the private markets at all times and has no social agenda. It is essentially neo liberal in character and has been a disaster to those on the receiving end. I assume that it has been made clear or written into a side letter that Irish money should be used for this purpose ? Why would the Troika want to give us room to manoevre?